VISITOR PLEASE NOTE
This is a page from the old DTQs website and is now somewhat outdated. The new site can be found at:

www.teqs.net

TEQs (Tradable Energy Quotas) is the new name for DTQs.

 

INTRODUCTION TO DTQs

There are two ways of reducing the demand for fossil fuels. Taxation of fuels is the most obvious and widely-canvassed one, but there are problems with it. It causes resentment, as Britain discovered when protestors against fuel tax brought the country virtually to a halt in September, 2000. It is hard to set a rate of tax which changes the behaviour of higher-income groups without causing unacceptable hardship for people on a lower income. And, as the price of oil and gas rises, taxation only raises it higher still, making a bad situation worse. The other solution is rationing, but in a form which is very different to the coupons-and-scissors methods of the past. A flexible modern rationing scheme distributes rations among consumers electronically; the rations can be traded; and the total allocation, or budget, maps out a path of decisive reduction in fossil fuel dependency, well into the future.

Various tradable rationing schemes have been devised. Those which apply to companies (among whom it is the right to emit carbon dioxide, rather than the right to buy fuel itself that is rationed) have been developed a long way, and some are already being applied in practice. Several "domestic" schemes, which would include consumers as well as firms in the rationing process, have also been suggested.1 One such scheme, DTQs, has been followed through in detail.2

DTQs are intended for use within an economy, and are complementary with international permits for trading between nations. There is broad (though not universal) acceptance that a fair framework for international action has to be "Contraction and Convergence", which would both reduce carbon dioxide emissions, and converge towards a point at which each nation's rights to pollute - the starting-line from which trading begins - are calculated on an equal per capita basis corresponding to population size. Another model of international cooperation in the reduction of fossil fuel use, designed in the context of oil depletion, is the Depletion Protocol.3

DTQs make it possible for ambitious international targets to be carried out within nations, by giving governments control of the rate at which fossil fuel consumption is reduced, while sharing out the available supply fairly, and maintaining flexibility in prices.

How DTQs work

The starting-point is the Carbon Budget. A decision is made as to the total volume of emissions of carbon dioxide (carbon emissions) that will be permitted in each year in the next 10-20 years. The Budget, defined in "carbon units", rolls forward week-by-week. Part of the Budget is issued as an unconditional entitlement to all adults; the remainder is sold by tender, a form of auction based on the issue of Treasury Bills, via banks and other outlets, to all other users such as industry, commerce and Government. The units can be bought and sold, so that users who cannot cope within their ration can top it up, and users who are most successful in keeping their fuel consumption low can sell and trade in the national market for carbon units.

DTQs are a hands-off scheme, with virtually all transactions being carried out electronically, using the technologies and systems already in place for direct debit systems and credit cards. The instrument has been designed to function well, not only for people who participate in it, but for those who do not – e.g. for overseas visitors, for the infirm and for those who refuse to cooperate.

The quota market

The carbon unit is defined as one kilogram of carbon dioxide. Nitrous oxide, methane and other global warming gases are rated in "CO2-equivalents" – the number of kilograms of carbon dioxide that produce the same amount of global warming as one kilogram of nitrous oxide, methane, etc. Approximate estimates (to be updated) have been made for the carbon units ratings of the main fuels and electricity. They are set out below.

Translating Emissions into Fuels. 4

Estimates of the global warming potential (GWP)
of gases released by the production and combustion of fuels.
1 kg carbon dioxide = 1 carbon unit.
The GWP of methane and nitrous oxide is measured
as carbon dioxide equivalents.

Fuel

Carbon units

Natural gas

0.2 per kWh

Petrol

2.3 per litre

Diesel

2.4 per litre

Coal

2.9 per kg

Grid electricity (night)

0.6 per kWh

Grid electricity (day)

0.7 per kWh

The domestic market (figure 1) works as a sequence. At the start, there is the Register (called QuotaCo); this is a computer database which holds individual carbon accounts for all participants in the scheme, like the accounts which are held for credit cards and collective investments.

(Figure 1)

The diagram shows how carbon units are placed on the market. The Entitlement for all adults, comprising households' direct consumption of fuel and electricity, accounts for about 40% of all emissions in the UK (estimate subject to revision). Carbon units representing this share of all carbon emissions are issued to adults on an equal per capita basis. (Children's carbon usage is provided for in the existing system of child allowances.) The remaining share (60%) is issued through the Tender to commercial and industrial companies and to the public sector. It is distributed by the banks to organisations using direct credit (for the units) and direct debit (for the payments).

When consumers (citizens, firms or the government itself) make purchases of fuel or energy, they surrender quota to the energy retailer, accessing their quota account by (for instance) using their carbon card or direct debit. The retailer then surrenders carbon units when buying energy from the wholesaler. Finally, the primary energy provider surrenders units back to the Register when the company pumps, mines or imports fuel. This closes the loop.

Some purchasers will not have any carbon units to offer at point of sale – for example, foreign visitors, people who have forgotten their card or cashed-in all their quota as soon as they received it. All these must buy quota when they purchase fuels, in order to surrender it, but they will pay a cost penalty for this: they have to buy them at the market's offer price and surrender them at the (lower) bid price: the difference between these two prices is the cost of their non-participation.5

The government receives revenue from the tender, and trading revenues are earned by the market-makers who quote bid and offer prices. Carbon units are bought and sold on the secondary market. Purchases and sales of quota (carbon units) are made on-line through home computers, through automatic teller machines (ATMs), over the counter of banks and post offices and energy retailers, and/or by direct debit with energy suppliers.

The carbon budget

The 20-year Carbon Budget (figure 2), is defined over three periods. Period 1 is a 5-year binding Commitment, which cannot be revised except by force majeure . Period 2, the 5-year Intention, is inflexible; the presumption is "no change", but it can be revised for stated reasons at an annual review. Period 3 is a 10-year Forecast, which is indicative only.

(Figure 2)

The Carbon Budget is at the heart of the scheme. It guarantees the targets for reduction in carbon emissions, and it provides the necessary notice of reductions in the future. Deep reductions in carbon emissions take time; people will need to take action now in the light of their knowledge of the quantity of carbon units that will be available in the future. There is an automatic reward in the form of lower prices if the economy adjusts smoothly and efficiently to the ever-decreasing quantity allowed by the Carbon Budget.

The Carbon Budget should be set by an independent body, like the UK's Monetary Policy Committee. This would relieve the government from having to defend the Budget itself, providing some protection from the political process, and (this is critical) allowing government to concentrate on helping the economy to achieve the targets which the independent body had set.6

Carbon reduction as a collective programme

Withdrawal from dependency on fossil-fuels will be an extremely ambitious and difficult programme. It will be achieved only if it is done as a joint, cooperative task. It will have to be designed in such a way that it is in the individual's interests not only to reduce his or her own carbon-dependency but also to cooperate with others in encouraging, persuading and collaborating with them to reduce theirs. The claim is that DTQs could provide the basis for this cooperation, collective motivation or (more simply) common purpose. That is to say:

1. It will be in individuals' interests to help others to reduce their carbon dependency.

This works in three connected ways. First, the fixed quantity makes it obvious that high consumption by one person means that there is less for everyone else. Your carbon consumption becomes my business: people will want to try to influence each other's behaviour for their mutual advantage.

Secondly, it is in the collective interest that the price of carbon units should be low. A high price would increase the cost of industry's purchases of energy, raising prices across the economy as a whole. However, the price of units would be ultimately under the control of the people who use them, since the more they were able to reduce their demand for units, the lower their price. If the public is confident that, by reducing the demand for carbon units, they can have an effect in keeping prices low, then there is an incentive to cooperate with each other to make it happen. And one of the essential conditions for this is the participation of the whole economy, including industry and the Government itself, in the same programme as citizens, committed to working within the same market, buying and selling units at the same price as everyone else.

Thirdly, carbon units lend themselves to local collective initiatives; they can be pooled as a local fund, and/or used as the starting-point for local cooperation in renewable energy and conservation, which will in due course need to be taken to the point of rebuilding the energy supply system with minigrids.

2. DTQs provide the framework for locating carbon reduction at the centre of public policy, aligning social values with individual responsibility.

DTQs place everyone in the same boat; households, industry and the government itself have to work together, facing the same Carbon Budget, trading on the same market for carbon units (and all loving to hate the Carbon Policy Committee which sets the budget to which they all have to adapt). Everyone is given a stake in the system. There will be a sense that one's own efforts at conservation will not be wasted by the energy profligacy of others, and that the system is founded on justice. In all these ways, the proposal connects with theoretical studies that explore the evolution of systems of collective interaction, in which incentives and institutions are mutually reinforcing and self-policing.7

Advantages of DTQs

1. Effectiveness

DTQs are effective. The carbon budget is a virtual guarantee that targets for reduced carbon emissions will actually be met. And they give a long term signal for action now to reduce carbon emissions in the future. Whereas some simple measures can be taken to reduce carbon emissions and energy use almost immediately (such as switching off the lights or driving a smaller car), the really decisive measures, derived from improvements in energy conservation, reductions in travel and transport, and radical increases in the generation of renewable energy, take years of sustained planning and development. DTQs give notice of the reduced quantity of carbon units that will be available in the future – and if their future prices are expected to be high, this will tend to increase their price in the present, too, making the incentive to take action unmissable.

2. Equity

DTQs are equitable, in that they supply an equal per capita entitlement to carbon units. And there is no government body manipulating the prices and taxes; it is citizens' own scheme.

3. Efficiency

DTQs are efficient because they respond precisely and accurately to demand and other changes in the economy: there is no need for the government constantly to make adjustments to prices as an input to the system. On the contrary, prices are an outcome; it is their flexibility which makes it possible to sustain a consistent Carbon Budget through all the economic and other changes that time may bring. DTQs are also efficient in their ability to appeal to the common purpose - shared aims and joint action to reduce dependency on fossil fuels. They are defined in terms of energy, not price; people’s minds will be focused directly on saving energy, rather than on the more general and indirect question of how to allocate their household budgets. It can be expected that, faced with this sharply-defined incentive to reduce fossil fuel consumption, consumers will devise ways of doing so as efficiently as they can.

Potential objections to DTQs

1. Effectiveness

Suppose that households and industry just gave up and made no effort to reduce their demand for fossil fuels: the prices of carbon units would rise rapidly; hardship stories and the political fall-out could be so awful that the government's nerve could crack and the scheme itself could be abandoned. And yet, all instruments would be vulnerable to a concerted failure of will. DTQs stand the best chance of placing the responsibility where it belongs: in the hearts of citizens. Carbon-reduction programmes in which the decision-making takes place in the bureaucratic uplands, and in which citizens are hectored or told what to do, or which twist citizens' arms by imposing taxes, will not work.

DTQs will require set-up costs which need to be estimated – but most of the technology and infrastructure already exist and are in place; the principle is much simpler than the paper rationing systems which were used in wartime Europe, and feasibility studies are progressing.

2. Equity

No instrument can claim to be entirely equitable. For example, people who live in remote areas may (relative to city-dwellers) have the disadvantage of having further to travel to work, and people with low incomes would have the disadvantage of being less able to buy top-up carbon units on the market than those on high incomes. And yet, there are compensations: people in rural areas would be able to generate much of their electricity; conversely (in a scheme in which the common purpose had been highly developed) heavy users would have the disadvantage that their conspicuous consumption exposes them to public rebuke and ridicule. There may be equity anomalies in the scheme, but not insoluble ones.

3. Efficiency

If DTQs caused prices to be volatile, that would be inefficient, but there is no reason why they should be more volatile under DTQs than with any other instrument. On the contrary, high fuel prices would reduce the demand for quota, tending to reduce its price, so that there is a stabilising effect.8

Conclusion

DTQs are a practical instrument designed for reducing carbon emissions within a market economy, and/or for smoothing the transition from the fuel-rich market economy to its fuel-efficient successor. A reduction of fossil fuel consumption, both to forestall climate breakdown and to adjust quickly and fairly to the coming fuel famine, is now intensely urgent. An instrument with DTQs' qualities of effectiveness, equity and efficiency is needed.9


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Home page
DTQs Dictionary
Memorandum on DTQs

Notes

1. The literature on personal carbon allowances discusses a variety of instruments. It includes: Simon Fairlie (1991), "Quotas Against the Great Car Economy", The Ecologist, Nov/Dec, pp 234-235; Mayer Hillman (1991), "Towards the Next Environment White Paper", Policy Studies, vol 12, 1, pp 36-51; Douthwaite (1992), The Growth Illusion, Hartland: Green Books, pp 211-212; Robert U. Ayres (1997) "Environmental Market Failures": Mitigation and Adaptation Strategies for Global Change, I, pp 289-309; Paul Koutstaal (1997), Economic Policy and Climate Change: Tradable Permits for Reducing Carbon Emissions, Cheltenham, UK: Edward Elgar; H.R.J. Vollebergh, J.L. de Fries and P. R. Koutstaal (1997), "Hybrid Carbon Incentive Mechanisms and Political Acceptability", Environmental and Resource Economics, 9, 43-46; Mark Whitby (1997), "Edge Debate on Transport Hears Call for Major Changes", Architects Journal, 29 May, p 16; and Robert U. Ayres, (1998), Turning Point, London: Earthscan. Mayer Hillman (2004), How We Can Save the Planet, London: Penguin. Mayer Hillman and Tina Fawcett (2004), How We Can Save the Planet, London: Penguin. See also the Tyndall Centre Website, http://www.tyndall.ac.uk/whatsnew/dtqs.pdf.

2. The model of Domestic Tradable Quotas was described in David Fleming (1996), "Stopping the Traffic", Country Life, vol 140, 19, 9 May, pp 62-65; David Fleming (1996 and 1997), Tradable Quotas: Setting Limits to Carbon Emissions, discussion papers, London: The Lean Economy Initiative; David Fleming (1997), "Tradable Quotas: Using Information Technology to Cap National Carbon Emissions, European Environment, 7, 5, Sept-Oct, pp 139-148; David Fleming (1998), "Your Climate Needs You", Town & Country Planning, 67, 9, October, pp 302-304); David Fleming, ed (1998), "Domestic Tradable Quotas as an Instrument to Reduce Carbon Dioxide Emissions", European Commission, Proceedings, Workshop 1-2 July, EUR 18451. David Fleming (2003), “Building a Lean Economy for a Fuel-Poor Future”, in Richard Douthwaite, ed (2003), Before the Wells Run Dry: Ireland’s Transition to Renewable Energy, Dublin: Feasta. For summaries of DTQs see, (e.g.) David Boyle (2002), The Money Changers, London: Earthscan. James Bruges (2004), The Little Earth Book, Bristol: Alastair Sawday. See also www.dtqs.org

3. The Royal Commission on Environmental Pollution acknowledges the central role of Contraction and Convergence. (2000), Energy: The Changing Climate, London: HMSO, Cmnd 4749, p 57-58. Aubrey Meyer (2000), Contraction and Convergence: A Global Solution to Climate Change, Schumacher Briefing No. 5, Dartington: Green Books. Tom Spencer (1998), "Contraction and Convergence", Town and Country Planning. Vol 45, 4. Depletion Protocol: see http://www.cge.uevora.pt/aspo2005/topics.php

4. Sources: Petrol and diesel: derived from ETSU (1996), Alternative Road Transport Fuels - A Preliminary Life-Cycle Study for the UK, London: HMSO; Table 3.10; and Commission of the European Community (1993), Corinair Working Group on Emission Factors for Calculating 1990 Emissions from Road Traffic. Gas: derived from ETSU (1995), Full Fuel Cycle Atmospheric Emissions and Global Warming Impacts from UK Electricity Generation, London: HMSO; Table B2. Coal: derived from ETSU (1995); Table B1. Electricity: ETSU (1995); Table 5.3. Carbon-equivalent indices, on a time-horizon of 100 years, for methane and N2O are, respectively, 21 and 310 times the GWP of CO2. (IPCC, 1996, Climate Change 1995; Table 4). The assistance of Simon Collings, John Lanchbery and Peter Taylor with this table is acknowledged with thanks.

5. But forgetting a credit card will probably be no barrier to electronic transactions in the future. As other forms of electronic recognition and identity cards develop, single-purpose carbon cards are becoming unlikely.

6. "Concentration" is one of the key themes of the instrument: it focuses totally on the problem of fuel; other sources of carbon dioxide, such as waste tips and agriculture would come within the remit of different programmes and instruments.

7. Alan Carling (1991) Social Division (London: Verso). Alan Carling (1997) 'Rational Vervet: Social Evolution and the Origins of Human Norms and Institutions', Imprints, 2:2, 157-73. Alan Carling (1998) 'Social Selection and Design' Proceedings of the Warwick/LSE Complexity Conference, 112-23. Brian Skyrms (1996) Evolution of the Social Contract (Cambridge: CUP).

8. The adverse consequences of price instability are discussed in Martin Weitzman (1974), "Prices vs. Quantities", Review of Economic Studies, 41, 4, pp 477-491; and in William A. Pizer (1998), "Prices vs. Quantities Revisited: The Case of Climate Change", Washington: Resources for the Future, Discussion Paper 98-02.

9. The possibility of sequestration calls for some qualification to the case for reducing fossil fuel consumption. If the promise of sequestration comes to pass, then this could have the effect of reducing the carbon rating of, for instance, electricity derived from coal.